Countries usually print their currency based on the growth rate of the economy and the demand for it in the economy. The demand for money from small countries like the Maldives is only within the local economy. Because there is a global demand for money from large countries like the United States of America, they are able to print money as much as they want without facing economic risks.
Since the establishment of a modern banking system in the Maldives and the establishment of a central bank, money has been flowing into the economy based on the growth rate of the economy. Even if the government withdraws money from the central bank under duress due to a situation, it is usually done in the short term. Under the law responsible for public expenditure, such withdrawals have to be refunded within a short period of time.
In 2020, during the Covid-19 pandemic, the government suspended the law and released billions of Rufiyaa from the central bank into the economy. At that time, the government had said that it would refund the amount to MMA within a year. However, in 2021, the deadline for payment was extended and more money was released into the economy. The government now wants the money not to be returned in any way again. The MMA, however, said that the money should be paid back with an interest.
Printing money in such a way without taking into account the extent of the expansion of the economy will have serious repercussions on the economy.
Currency will devalue
The Maldivian Rufiyaa is pegged against the US dollar. Thus, the official rate for the Rufiyaa is MVR 15.42 per dollar. This rate is fixed by the central bank. This is called "fixed exchange rate".
When a country has a fixed exchange rate, it means that the value of its currency is fixed or pegged to the value of another currency or a basket of currencies. This means that the country's central bank has agreed to buy and sell its currency at a fixed rate relative to the other currency or currencies.
One way that a country can maintain a fixed exchange rate is by holding foreign currency reserves, which are assets held in the form of other currencies. These reserves can be used to buy the country's own currency if the demand for it increases, or to sell the country's currency if the demand decreases. By doing so, the central bank can keep the exchange rate stable and prevent large fluctuations in the value of the currency.
However, if the central bank prints too much of its own currency, it can lead to a situation known as "currency devaluation." When there is more of a particular currency in circulation, it can lead to an excess supply relative to the demand, which can cause the value of the currency to fall. This can also lead to inflation, as the excess currency in circulation can lead to higher prices for goods and services.
Depletion of foreign reserves
In a country with a fixed exchange rate, currency devaluation can be especially problematic because it can deplete the country's foreign currency reserves. This is because the central bank will need to use up its reserves to buy up the excess supply of its own currency in an effort to maintain the fixed exchange rate. If the central bank's reserves are depleted, it may no longer be able to maintain the fixed exchange rate, which can lead to a further devaluation of the currency.
For countries that printed money irrespective of economic realities, the damage lasted for generations. Some countries are still struggling to come to terms with it.
In the late 1990s and early 2000s, Zimbabwe experienced hyperinflation due to a number of economic and political factors, including a decline in agricultural production and international sanctions. To try to stimulate the economy, the government printed large amounts of money, leading to an excess supply of currency and a rapid devaluation of the Zimbabwean dollar. By 2009, the inflation rate had reached an estimated 79.6 billion percent, and the government was forced to abandon its own currency and adopt the use of foreign currencies.
Maldivian economy today
The Maldivian economy is in a precarious position at the moment. The country's foreign exchange reserves are at a low of $98 million, and the government has had to turn to borrowing to try and address the issue. One contributing factor to the decline in reserves is the high cost of fuel, but the central bank's use of foreign currency reserves to stabilize the value of the currency has also played a role. The government has been warned about the potential for depreciation of the currency if it continues to print money, but so far it has not taken action to address the problem. If the situation is not resolved soon, it is possible that the official exchange rate for the Rufiyaa will have to be adjusted to match the current black market rate of 17.40.